As the famous Wall Street adage goes, “sell in May and go away,” but CFRA Research suggests a different approach to maximize gains this spring. The Stock Trader’s Almanac suggests that the worst six months of the year for the S&P 500 starts in May and ends in October. However, CFRA’s chief investment strategist, Sam Stovall, advises investors to “rotate, don’t retreat!” during the May slump.
Stovall recommends traders to focus on defensive names instead of entirely exiting the market. He suggests that some sectors will have their day in the summertime sun, while others will skate along smoothly in winter.
Since 1990, consumer staples and health care sectors recorded average price gains of 4.5%, while the overall market was eking out an advance of 2.2% during the challenging May to October period. Conversely, cyclical consumer discretionary, industrials, materials, and technology sectors outpaced the market as a whole from November to April, with average price gains returning 9.0%.
While the Stock Trader’s Almanac assumes that money is invested in fixed income securities the other six months, CFRA suggests that investors should look towards defensive names during the May slump instead of entirely exiting the market. Reducing long exposure and adopting a defensive stance will pay off for investors during the low period. For those with a lower risk tolerance or a desire to take a break from trading, the “Worst Months” are a great opportunity to unwind some longs and move into the relative safety of cash, Treasury bonds, gold, and/or some combination of traditional defensive assets, according to the stock almanac’s editor, Jeff Hirsch.
In conclusion, investors should consider rotating their portfolios during the May slump instead of entirely exiting the market. With a focus on defensive names, investors can maximize gains during the worst six months of the year.
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